E*Trade is warning its investors that profits will come in 31% below estimates and that it is exiting the wholesale mortgage business and “streamlining” its direct mortgage operation due to the “disturbance in the credit markets.”

E*Trade is reassuring its customers that it remains healthy despite the restructuring. From E*Trade’s letter to its customers:

Today, we took proactive measures to further insulate E*TRADE from the recent declines in the credit markets. You can feel assured that the measures we’ve taken are non-issues for our customers. Although industry-wide liquidity and credit concerns are making daily headlines, E*TRADE’s business fundamentals are firmly on track, our balance sheet is strong, we have substantial capital and we continue to be profitable – with projected earnings of approximately $500 million in 2007.

There is no word on how many positions might be cut as part of the restructuring.

The company went after more affluent customers, using “the massive growth in cash” from them to increase its real-estate portfolio. Sounded good at the time, and Caplan believes it sounds just as good today. The difference between his company and many other mortgage investors, he says, was that E-Trade stuck with higher-quality “generic” first mortgages, accepting smaller returns in exchange.